As we continue through the slow and painful process of building a bottom after the great techwreck of 2000/2001, we have the opportunity to crash-test a great investment thesis from the irrationally exuberant era of the late great bull market — “gorilla investing.” And unlike so many of the discredited philosophies in which we all believed so deeply just a few short years ago, this one is looking remarkably robust in these sadder but wiser times.
The Gorilla Game: Picking Winners in High Technology was published in 1998, and it quickly became a Bible for technology investors in the great bull market of the late 1990s. The thesis of its three authors — Geoffrey A. Moore, Paul Johnson and Tom Kippola — was that the task of technology investors was to find “the next Microsoft.” The idea was to identify an emerging technology that could be really big, and then identify the company that would set the standards in that technology and then dominate it like an 800-pound gorilla.
It was the perfect bull market strategy, wasn’t it? In a world in which the rising tide was lifting all boats, looking for gorillas was an easy game. If you really found a gorilla, you could end up with a sweet ten-bagger in your portfolio. But if you missed and only came up with a chimp, you could always console yourself with a mere triple. Now we get to see how gorilla investing plays out in a bear market, when the ebbing tide pulls out and leaves a landscape of rusty cans and moss-covered boots on the beach.
For those gorillas that turn out to really be dinosaurs, today’s severe technology spending slowdown could mean extinction. If giant legacy-bound technology companies like Nortel, Lucent, and Hewlett Packard can’t evolve rapidly enough to adapt to catastrophic environmental change, then it’s all over. But on the other hand, smarter gorillas can use their size and strength to get through the tough times — and come out on the other side with a lot less competition. For the surviving gorillas is will be like Nietzsche said, “What does not destroy me, makes me stronger.”
That’s the way it’s working so far for chip gorilla Intel in the latest round of its decades-long death match with its smaller arch-rival Advanced Micro Devices. Intel came into today’s tech recession with a real disadvantage — it’s next generation Pentium 4 microprocessor ran slower than AMD’s last generation Athlon. It was the perfect chance for the chimp to vault ahead of the gorilla — and for a while there I really thought they’d make it. But Intel bet that its advantage in scale-economies would be greater than AMD’s advantage in technology. Intel launched a price war which — judging by AMD’s latest quarter — AMD just can’t win. Yes, AMD is growing its market share with its technology edge. But at today’s lower prices, sub-scale AMD loses millions more with every market share point they earn. The gorilla wins.
Here are the numbers that say it all: the NASDAQ Composite has risen 26.09% off its bottom on April 4. Intel has risen 39.99%. AMD has fallen 7.18%.
This Tuesday we’ll see how another — and more important — death match turns out. When Cisco reports its earnings, we’ll see if it’s really going to be able to play the router gorilla, and put Juniper Networks in the losing postiion of router chimp. It’s important, because this is the first market trough that the networking stocks have ever had to get through. We’re used to this kind of thing with semiconductors, having lived through it over and over during the last three decades. But this is something new. This is where we learn in an entirely new industry how to tell the chimps from the gorillas, and the gorillas from the dinosaurs.
Which will Cisco turn out to be? We’ve heard that Cisco is employing a “golden hatchet” strategy against Juniper, devoting itself to win any new router business at any cost. To pull that off without destroying margins means that Cisco will have had to invent in the networking industry the same scale economies and disciplines that Intel has learned over decades of dominating the semiconductor industry. One of the best Cisco-watchers on the street, Chris Stix at Morgan Stanley, thinks they’ll make it. He’s looking for Cisco to report 7% to 10% market share gains versus Juniper, on improving margins.
So far the market agrees. Compared to the NASDAQ’s 26.09% gain since April 4, Cisco is up 46.46%. Juniper is down 5.10%.
Stix’s view got into the marketplace last week, and was part of the wave of renewed confidence that helped the NASDAQ break out of the downtrend its been in since its top on May 22. But now Cisco has to deliver. If they do, then that should be the rocket-fuel that will propel the NASDAQ back above the May 22 highs, and on to 2300. But if Cisco reports poor share gains or eroding margins, then look out below.
—Don Luskin is President and CEO of MetaMarkets.com. MetaMarkets.com is using the Internet to revolutionize mutual fund investing and foster a unique online discussion community for sophisticated individual investors. MetaMarkets.com Funds is the only fund family today that allows Web site visitors to see its funds’ entire portfolio holdings and other fund statistics updated continuously in real time. Copyright 2001 MetaMarkets.com, Inc. All rights reserved.
The views expressed within represent those of the author, and do not necessarily reflect those of Capitalism Magazine’s publishers.
